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Identifying shifts in spread using the Cauchy CUSUM: an application to the Japanese yen/US dollar exchange rate

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  • John Dukich
  • Douglas Hawkins

Abstract

It is well known that the log price relative of floating exchange rates, as well as a variety of other commodities and securities, does not follow a normal distribution but instead tends to be characterized by a heavy-tailed stable Paretian distribution. Specifically, we illustrate this property of floating exchange rates with the Japanese yen/US dollar exchange rate. Furthermore, we show that the distribution itself changes from time to time, with periods of sustained shifts in volatility. To capture the heavy-tailed nature of the distribution, we develop a Cumulative Sum (CUSUM) chart based on the Cauchy distribution to identify these periods of differing volatility.

Suggested Citation

  • John Dukich & Douglas Hawkins, 2010. "Identifying shifts in spread using the Cauchy CUSUM: an application to the Japanese yen/US dollar exchange rate," Applied Financial Economics, Taylor & Francis Journals, vol. 20(5), pages 417-424.
    • Handle: RePEc:taf:apfiec:v:20:y:2010:i:5:p:417-424
    DOI: 10.1080/09603100903373272
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